The U.S. economy is recovering gradually, unexcitingly and unsteadily while pro-risk behavior is making its way back into the market, a financial expert said Monday.
“I’m optimistic that this year will be better than last year -- maybe three steps forward and one step back," said Howard Marks, chairman of Oaktree Capital Management. "I still think it’s a sputtering type of recovery and not a dynamic liftoff. I’d like to be wrong, but I don’t think so.”
Marks joined Keith McCullough, CEO of Hedgeye Risk Management, and moderator Jane Wells, a CNBC reporter, at the CFA Society San Diego’s 2014 annual investment forecast dinner on Monday at the Hyatt Regency La Jolla at Aventine.
Confidence is the main reason why the United States isn’t going to have a dynamic recovery, Marks said. Confidence is “self-fulfilling” and determines the course for the future of the economy.
“If people believe that times will be good ahead, then they will spend and invest and times will be good," Marks said. "If they’re pessimistic, then they’ll tighten their belts and they won’t spend and they won’t invest and the future won’t be good.”
One of the best things the economy has going for it is low expectations, Marks said. “The greatest winnings come when people have low expectations and are [positively] surprised. … Nothing would make the market go up like the market going up.”
Marks expects to see a reduced growth of credit -- especially at the consumer level and until confidence is restored -- which will also hold the economy back.
The low-interest-rate environment has created the lowest returns on fixed income in our lifetimes, he said. There are heavy flows of cash and a high level of competition to make investments.
The price and prospective return is determined by relative balance between the eagerness of people to invest money and the eagerness of other people to sell assets, Marks said.
Right now, people are eager to invest, and there isn’t a lot of urgency on asset holders to sell.
This has created an environment in which a lot of people want to put money to work, [and] not too many people want to cash out, he says. This causes a strong imbalance of demand over supply for most investment assets.
“When demand for investment assets outstrips the supply as it is now, you see greater quantities of security issuance,” Marks said.
When the quantity of security issuances increases, the quality declines, Marks said. Risky forms of issuance engaged in before the crisis are commonplace again.
“Basically, people are engaging in risky behavior and I find that very worrisome,” Marks said.
Instead of forecasting, Marks said, he determines how to take a stance that balances offense and defense, looks at valuation and takes the “temperature of the market.”
He said a version of his motto is: “I believe we never know where we’re going, but we sure as hell better know where we stand.”
Marks said he thinks people are again acting “bold and euphoric and aggressive,” and markets are moving in the direction of being heated. Valuations are moderate and equity valuations are seemingly moderate, he said, adding that the worst of the pro-risk behavior is in the credit world.
Marks listed many actions that he deemed the most important, as he does in his book “The Most Important Thing.”
“Determining the balance between aggressiveness and defensiveness is the most important thing,” Marks said.
Today, Marks is somewhere in the middle of defense and offense.
“I don’t think we’re in a bubble; I don’t think we’re in a crash,” Marks said.
There are no macro classes that are bargain-priced, in his opinion -- some are cheaper than others, but there are no “screaming bargains.” Most assets are on the “high side of fair,” not “screamingly overpriced,” but nothing is cheap, he said.
“The bottom line for me is: I don’t see the outlook as being so bad," Marks said. "I don’t see prices being so high that we can’t invest and hold assets. But I just don’t see any reason to do it aggressively.”
Many people have been forced to take more risk in pursuit of returns they used to get safely, Marks added, and people have moved into new asset classes.
In the last few years, risk bearing has worked quite well, he said.
“When risk bearing is No. 1, mandated by the environment and No. 2, rewarded, people usually forget to be cautious, and when they forget to be cautious, we must remember,” he said.